Intertemporal preference

Multi-data consumption plans

Assumption
In one-period models individuals can consume both at time 0
(beginning-of-period) and at time 1 (end-of-period).
In multi-period models individuals can consume either at each date in
the discrete-time. set T = {0, 1, 2, . . . , T} or at each date.
in the continuous-time set T = [0, T]. In both cases a consumption
plan is a stochastic process
Utility Index VS Multi-date utility function
Given Monotonicity and Archimedean Given Archimedean and Substitution
Axioms: Utility index exists Axioms: Multi-date utility function exists

Take an example in the discrete-time

Additively Time-Separable Expected Utility
Assume that ( ) = direct utility the individual gets from
a given consumption level is the same for all date, but the individual
prefers to consume sooner than later. preference rate ,

life-time utility in continuous-

life-time utility in discrete-time time
Habit formation utility
The key idea of habit formation is to let the utility associated with the
choice of consumption at a given date depend on past choices of
consumption.
There are two kind of dependent: internal denoted by h and external
denoted by X (i.eKeep up with Jones)

Habit Formation -
Habit formation function =0 ,
ht is a measure of the standard of living or the habit level of
consumption. = 0 + 1=1 ()

Utility function

With uc and ucc are the first- and second-order derivatives of u with
respect to c.
Habit formation
External factors inuencing the preferences of the individual is factors
that are not fully determined by choices made by the individual
Aka keeping up with the Joneses preferences.
Xt is denoted as the external factor
Time additive life-time expected utility

Utitlity function
Recursive or Epstein-Zin utility
A recursive utility function can be constructed from two components:
A time aggregator that characterizes preferences in the absence
of uncertainty
A risk aggregator that defines the certainty equivalent function
that characterizes preferences over static gambles and is used to
aggregate the risk associated with future utility.
EpsteinZin preferences, the time aggregator is a linearly
homogenous CES aggregate of current consumption and the certainty
equivalent of future utility.
Recursive or Epstein-Zin utility
EpsteinZin preferences

the time aggregator is a linearly homogenous CES aggregate of

current consumption and

The certainty equivalent of future utility.